Oracle’s Ellison Stands to Miss Payment for Pillar

Oracle 's 2011 deal to buy Pillar Data Systems, a company largely bankrolled by CEO Larry Ellison, was widely seen as unusual. Now a court settlement makes it even less likely he’ll ever profit from his investment in the startup.

Ellison had put $544 million into Pillar, a company founded in 2001 whose Axiom data-storage system is now sold by Oracle.

According to Oracle filings and court documents in a shareholder suit filed in Delaware, Oracle paid no money up front to buy Pillar. Rather, a contingent “earn-out” arrangement provided for a possible payment by November 2014 that would be based on the performance of the acquired operations.

An affiliate of Ellison’s was entitled to receive the first $565 million of any such payment, according to an Oracle 10-K filing.

Two Oracle shareholders–the City of Roseville Employees’ Retirement System and the Southeastern Pennsylvania Transportation Authority–filed a shareholder derivative suit in Delaware Chancery Court that names Ellison and other Oracle directors as defendants. It alleged that the transaction was tainted by conflict of interest–in other words, directors were essentially bailing Ellison out of an unwise investment. Such derivative suits are designed to be in favor of the company involved, though Oracle is also described as a “nominal defendant” in this case.

Oracle said at the time of the transaction that Ellison recused himself from board deliberations about the deal, and the defendants continue to deny the allegations in the case. But they agreed to a settlement.

It states that whatever the earn-out payment might ultimately be, Ellison must make a contribution to the capital of Oracle in an amount equal to 95% of the amount that he and his affiliates would have received.

But that might not turn out to be much of a hardship, in view of the circumstances. At the time the Pillar purchase was approved, the potential value of the earn-out payment was estimated to range from $325 million to $575 million. In June, however, Oracle estimated its liability associated with the earn-out payment to be zero.

Meanwhile, a battle is continuing over legal fees in the case. Attorneys for the plaintiffs plan to seek $19.9 million in fees, which an insurer has so far declined to pay. The settlement is contingent on that matter being resolved.